by Timothy S. Jost, Robert L. Willett Family Professor of Law, Washington and Lee University School of Law

On January 15, 2014, the ACA won its most important legal victory since the Supreme Court upheld the individual mandate in NFIB v. Sebelius. Judge Paul Friedman of the federal court for the District of Columbia ruled in Halbig v. Sebelius that an IRS rule authorizing the issuance of premium tax credits in states with federal exchanges was supported by the “unambiguously expressed” intent of Congress, and thus valid.

The issue in Halbig is this: The ACA authorizes the IRS to offer premium tax credits to individuals who have household incomes between 100 and 400 percent of the federal poverty level and who are not eligible for other forms of coverage (such as employer coverage, Medicaid, or Medicare). Premium tax credits are, however, only available for insurance purchased through the exchanges. The ACA requests the states to establish exchanges, and sixteen states have done so. The ACA also, however, authorizes the federal government to establish exchanges in states that choose not to set up their own exchanges. The federal exchange covers 34 states.

Two clauses of the ACA section authorizing premium tax credits provide that tax credits are available for months in which an individual is enrolled in a qualified health plan “through an Exchange established by the State under 1311” of the ACA. The plaintiffs in Halbig argue that this provision bars the IRS from issuing premium tax credits to individuals who enroll through federal, as opposed to state, exchanges.

A victory for the plaintiffs on this theory would have blown a major hole in the ACA. Not only would it have barred millions of Americans who live in federal exchange estates from receiving premium tax credits, it would have also rendered the employer mandate unenforceable in those states. Employers that do not cover their employees are only subject to a tax penalty if employees receive premium tax credits through an exchange.

A plaintiff victory would have also weakened the individual mandate, as many individuals who may be subject to the individual mandate tax are individuals for whom coverage would be unaffordable – and who would thus be exempt from the mandate – were it not for the assistance they will receive for purchasing insurance through premium tax credits. Indeed, it is likely that a plaintiff victory would have caused the collapse of the entire individual insurance market in and outside of the exchanges in federal exchange states, as insurers would have had to cover all applicants regardless of pre-existing conditions without the benefit of premium tax credits or an employer mandate and with a weakened individual mandate.

Judge Friedman, however, had little trouble disposing of plaintiffs’ arguments. When the rules of federal agencies are challenged, courts review them under the rule established by the Supreme Court in Chevron v. Natural Resources Defense Council. Chevron requires courts to first ask whether Congress spoke directly to the issue in question, in which case an agency must effectuate the “unambiguously expressed intent of Congress.” If a statute is silent or ambiguous, however, courts must defer to an agency’s interpretation of the law if the agency’s interpretation is based on “a permissible construction of the statute.” Judge Friedman did not need to reach the question of whether the IRS construction of the statute was permissible, because he found that the ACA unambiguously authorizes federal exchanges to issue premium tax credits.

Judge Friedman noted that the language on which the plaintiffs based their challenge “viewed in isolation” appeared to support their challenge. But, judges interpreting statutes do not look at particular provisions in isolation; rather they look at the context of the provision within the statute and the purpose of the statute. The ACA clearly requires the federal government to establish exchanges in states that fail to do so, which effectively become state exchanges. It is not possible, the judge held, to interpret the statute as plaintiffs read it without ignoring many other provisions of the ACA, which give federal exchanges the same authority and responsibilities as state exchanges. Moreover, depriving residents of 34 states of premium tax credits would run contrary to the clear purpose of the statute, to provide coverage to Americans in all states. Finally, the judge could find no support for the plaintiff’s interpretation of the statute in the legislative history.

This is only one battle in a long war. The Halbig litigation is sponsored by the Competitive Enterprise Institute and plaintiffs are represented by Michael Carvin, who represented the plaintiffs in the NFIB litigation. These are determined opponents of extending health coverage to lower- and middle-income Americans, and they are not going to give up in their fight. Three cases are pending in federal courts in other states raising this issue, and the plaintiffs have already appealed to the D.C. court of appeals and asked for an expedited hearing. But Judge Friedman’s decision is well-reasoned and convincing and will undoubtedly be upheld on appeal. The war for covering the uninsured will not be over soon, but the Halbig decision is a major victory on an important front.